Oct. 13 (Bloomberg) -- With a U.S. deadline three days away, clients of UBS AG and other foreign banks have turned law offices into therapy suites as they seek advice on whether to reveal offshore accounts to tax authorities or risk prosecution.

Attorneys helping taxpayers navigate the Internal Revenue Service voluntary disclosure program are hearing dramas that mix personal finance with fear, including stories of cash stashed beneath homes during the Holocaust, accounts hidden from spouses and relatives who might be implicated, tax lawyers say.

“Some people come in and are very nervous,” said Barbara Kaplan, an attorney at Greenberg Traurig in New York, who represents about 75 taxpayers who plan to come forward. “With some, there are lots of tears. I tell them I can’t deal with their emotional issues relating to this. You have to talk to your therapist about that. I charge too much for that.”

The program, ending Oct. 15, lets taxpayers avoid prosecution and public disclosure of their identities by revealing their accounts and paying back taxes, fines and penalties. More than 3,000 signed up through Sept. 21. The IRS made the offer March 26, a month after Zurich-based UBS paid $780 million and avoided prosecution by admitting it helped Americans evade taxes.

UBS, the largest Swiss bank, first agreed in February to give names of 250 U.S. taxpayers to the government. In August, it agreed to disclose another 4,450.

The voluntary disclosure program isn’t open to taxpayers already under scrutiny by the IRS. Since December 2007, six UBS clients pleaded guilty and a seventh agreed to do so. A UBS banker pleaded guilty; two were indicted; and three Europeans were charged with enabling U.S. tax evasion. The Justice Department has said 150 taxpayers are under criminal investigation.

Tax Requirements

U.S. taxpayers can legally hold securities in other countries or withdraw funds from foreign accounts. They are, however, required to disclose their existence on annual tax forms filed with the IRS and a Report of Foreign Bank or Financial Accounts, or FBAR. Failure to do so could lead to prosecution for tax evasion or filing a false tax report.

“I’ve got people in complete denial, and people who are panicked out of their mind,” said Robert Katzberg of New York- based Kaplan & Katzberg, who represents 18 clients making disclosures to the IRS. “There are myriad different human considerations.”

Some clients would rather risk prosecution than pay fines and penalties, Katzberg said. Others choose to disclose their accounts, he added.

FBAR Penalties

Under U.S. law, the IRS can confiscate half of an offshore account’s value when the holder deliberately fails to disclose it. The penalty can apply each year the FBAR form isn’t filed.

As an incentive to join the amnesty program, the IRS will take 20 percent of the account’s assets based on its peak value in the previous six years. If an account was inactive, it may take as little as 5 percent.

One advantage to the program is that it allows U.S. clients to repatriate foreign assets that are illiquid and cannot be moved easily back into the country, lawyers say.

A U.S. surveillance system that reviews large cash transfers is intended to prevent fraud, money laundering, and the movement of funds by terrorists. Such transactions often trigger the filing of a so-called suspicious activity report by the Treasury Department, which can prompt investigations into the money’s source.

Clients who reveal their accounts to the IRS also can avoid the notoriety of prosecution, Kaplan said.

Avoiding Embarrassment

“Most of the people are very interested in anonymity,” she said. “They don’t want their name in the press. Probably for some it is an incentive. You won’t be embarrassed or vilified in your country.”

A man who contacted Katzberg before the UBS settlement and chose not to reveal his assets had fled his native Poland after the 1939 Nazi invasion. After emigrating to the U.S., he kept a UBS account, which grew to millions of dollars, Katzberg said. He wanted the assurance of the safety of Switzerland’s banking system, according to the lawyer.

The man, who Katzberg declined to identify, is unmarried and is leaving the U.S. government his money when he dies, the lawyer said. Still, he refused to come forward because he doesn’t think Switzerland would betray his trust, Katzberg said.

“It broke my heart,” said the lawyer, who said he advised the man to disclose the account.

Some people are keeping their accounts secret to avoid implicating Swiss lawyers, U.S. accountants and relatives, he said.

Rush of Clients

The extension of the disclosure deadline, originally Sept. 23, spurred a rush of clients, tax lawyers said. So have letters from UBS telling ex-customers they may be on the list given to the U.S., they say.

Fifty clients approached the New York law firm Kostelanetz & Fink in the past week, attorney Robert Fink said. The firm represents 300 people making voluntary disclosures.

Preparing the IRS’s disclosure papers has forced some people to revisit their personal histories, Fink said.

“The wrenching stories are the Holocaust survivors” who sought Swiss bank accounts as safe havens, Fink said.

One client survived a concentration camp then opened a Swiss bank account with money he retrieved that his family hid in Budapest during World War II, the lawyer said. He never found the silver his parents had hidden in a well beneath their house.

Other clients divulged deep-seated fears of the U.S. banking system that led them to stash money in Switzerland in the first place, said William Sharp, a Tampa, Florida-based attorney.

“They were concerned about the U.S. abandoning the gold standard in the ‘70s,” Sharp said. “Some people were concerned about the Soviet threat. They had legitimate fears about the safety of the U.S. banking system.”

To contact the reporters on this story: Carlyn Kolker in New York at ckolker@bloomberg.net and; David Voreacos in Newark, New Jersey, at dvoreacos@bloomberg.net.

Last Updated: October 13, 2009 10:17 EDT